Don't Forget To Budget For Closing Costs
For many first-time homebuyers saving for a down payment can be challenging. You may have saved the minimum 5 per cent down payment, but have you set enough money aside for closing costs? First-time homebuyers often make the mistake of not budgeting for closing costs. Closings costs can easily amount to over $10,000 in Canada’s most expensive market, Vancouver. Let’s take a look at the most common closing costs and how much you should set aside.
What are Closing Costs?
You’ve been pre-approved for a mortgage, so you know what your housing budget it. You’ve saved the minimum 5 per cent down payment and you have your deposit ready. Do you think you’re ready to buy a house? Think again. While your lender may provide you with the funds for a mortgage, it’s your responsibility to have enough money saved to cover closing costs. You’ll typically pay between 1.5 to 4 per cent of your home’s purchase price towards closing costs. If you’re making just a 5 per cent down payment, your closing costs can easily be almost as much. It’s important to budget for closing costs before you start house hunting; the last thing you want is have to come up with the funds last minute.
Let’s take a look at how easily closing costs add up. As a first-time homebuyer you’ve decided to buy a condo in Vancouver. You’d like to own a house one day, but with the average house price at over $1 million, you’ve decided to put your dreams of home ownership on hold for now. In March 2013, the average condo price in Vancouver was $481,250. Not only will you have to be able to cover the down payment, you’ll also have to save enough for the closing costs. If you’re making the minimum 5 per cent down payment, you’ll need at least $24,063 set aside. That’s not all. You’ll also need to budget between $7,219 and $19,250 (1.5 to 4 per cent) for closing costs. As you can see, there might only have a $4,813 difference between your down payment and closing costs. That means you’ll need to save at least $43,313 to buy a condo.
Closing Costs for Buyers
When you think about closing costs, what comes to mind first? It’s probably the home inspection, but that’s only a few hundred dollars, so how do closing costs amount to thousands? Let’s take a look at the most common closing costs to budget for before you take possession.
- Home Inspection: A home inspection is a must-have when buying a resale home. It can identify costly repairs and maintenance. You should budget at least $300 for an inspection.
- Appraisal: Just because you paid $725,000 for your house doesn’t mean it’s worth that much. An appraisal tells your lender how much your property is really worth. Appraisals can cost between $150 and $250.
- Property Transfer Tax: When buying real estate in B.C. you’ll have to pay land transfer tax. You’ll have to pay 1 per cent on the first $200,000 of your home’s selling price and 2 per cent on the remaining amount. This is usually your most expensive closing cost. If you’re a first-time homebuyer, you may qualify for a partial or full refund.
- Legal Fees: While your real estate agent helps you find a home, your real estate lawyer helps close the deal once the Contract of Purchase and Sale is signed. Your real estate agent will register your mortgage contract, protect your legal interests and calculate any prepaid utilities owed to the seller. Expect to spend between $350 and $1,500 on a real estate lawyer.
These are just some of the most common closing costs. You can view a complete list here: http://www.yourvancouvermortgagebroker.ca/chapter-14-extra-costs-to-consider/.
Hopefully you’re convinced about the importance of budgeting for closing costs. If you don’t save for closing costs, not only will you have to come up with thousands of dollars last minute, your dreams of homeownership could be dashed if you can’t come up with the money.